02819cam a22002657 4500001000700000003000500007005001700012008004100029100002300070245012400093260006600217490004200283500001800325520161800343530006101961538007202022538003602094690009402130690011202224700002302336710004202359830007702401856003802478856003702516w17484NBER20161209234619.0161209s2011 mau||||fs|||| 000 0 eng d1 aJagannathan, Ravi.10aPrice Dividend Ratio Factors h[electronic resource]:bProxies for Long Run Risk /cRavi Jagannathan, Srikant Marakani. aCambridge, Mass.bNational Bureau of Economic Researchc2011.1 aNBER working paper seriesvno. w17484 aOctober 2011.3 aWe evaluate the empirical support for a broad class of long run risk models using information in factors extracted through principal component analysis of the covariance matrix of log price dividend ratios of twenty five equity portfolios formed on Size and Book-to-Market. We identify two price-dividend ratio factor proxies for economy wide long run risk, one tracking the volatility of the growth rate in economy wide aggregate consumption, and the other predicting the growth rates in the stock index portfolio dividends and aggregate consumption, consistent with the implications of these models. We show that that the long run risk factor driving expected consumption growth is not recoverable from the cross section of excess returns alone. The price dividend ratio factors perform better than the stock index price dividend ratio and the corporate yield spread, and has information in addition to what is in the slope of the term structure of interest rates, in forecasting the growth rate in real time consumption and stock index dividends. The covariance of excess returns with factor innovations explain the cross section of excess returns on size, book/market, earnings/price ratio, long term reversal, and short term reversal sorted portfolios in a manner robust to look-ahead and useless factor biases. Our findings suggest that the widely used Fama and French (1993) three factor model and the long run risk models studied in the literature are not necessarily inconsistent with each other. They may be representing the same underlying phenomenon, but emphasizing different aspects of reality. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aG11 - Portfolio Choice • Investment Decisions2Journal of Economic Literature class. 7aG12 - Asset Pricing • Trading Volume • Bond Interest Rates2Journal of Economic Literature class.1 aMarakani, Srikant.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w17484.4 uhttp://www.nber.org/papers/w1748441uhttp://dx.doi.org/10.3386/w17484